Lecture 4 Entering a Business Forms of Business Organizations Dr. Hatem Elaydi ECOM 5368 Engineering Management (Entrepreneurship & ework) Islamic University of Gaza Sep 3, 2016

Learning objectives Learning tasks: State the ways of entering a business Describe starting a business Describe buying a existing business Describe purchasing a franchise Select appropriate way of entering business Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Ways of entering a business Starting a new business Buying an existing business Purchasing a franchise Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Starting a new business: Advantages Choose business structure Choose product, location, facilities Establish business policies Unlimited profit potential Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Starting a new business: Disadvantages Greater time commitment Greater financial risks Develop product differentiation Long hours and irregular income (initially) High competition level Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Buying an existing business: Advantages Save time, energy, money Sales begin early Inventory and suppliers established Assistance and equipment established Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Buying an existing business: Disadvantages Wrong location Renovations may be required Improved customer relations needed Difficult to change established policies Unsuitable employees Purchase price too high Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Evaluating an existing business Financial analysis Accounts Receivable/payable Inventory Assets Liabilities Bank loans Lease Agreements. Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Buying a franchise: Advantages Franchiser provide training and counseling Proven marketing system Sales begin early Franchiser helps choose location Improved chance of success Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Buying a franchise: Disadvantages Expensive to purchase Royalty fees paid annually High startup cost Loss of independence Inflexible promotion plan Some franchises are misrepresented Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Questionnaire for starting a new business What is the total market potential? The growth potential? How many competitors are there and what is their market share? Are sales forecast correct? Is there enough money for operating capital? How long can I survive without earning an adequate salary? Can you buy the right products at the right time? Can you buy and afford equipment? Do you have all the necessary skills essential to operate this business venture? If not, what skills do you need to acquire? Where and how will you find and hire the appropriate staff? Once they are hired, how will you keep them? Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Questionnaire for buying an existing business Is the business in a good location? Is the marketability of the product going to improve or decline? What are the seasonal sales patterns? Are the sale records reliable? Will you be able to retain the current suppliers? Do you know the real reason the business for sale? Will the seller assist you after the sale? Do you know the sales figures(peaks & valleys)? Are the assets you are buying free of debts and liens? (if not, do you know the terms of repayment?) Will your cash flow from operations be enough to pay your debts? Have you checked the business’ credit rating? Do you know the market value and the replacement value of assets you are Buying? How is the current inventory or work-in-progress to be valued at time of closing?

Questionnaire for buying an existing business…(2) Have you done a cash flow projection and profitability projection? Do you know what your breakeven point is? Have you allowed adequate salaries for everyone? Has inventory been accurately calculated? Has any of this inventory been sold but not shipped? Have all expenses been accurately calculated? Is some of the inventory on consignment? Re there large annual expenses coming due soon? Are you insured adequately? Do you know what is required to get the licenses you need? Is all the equipment you are buying in good shape and operational? What share of the market do you expect to carry?

Questionnaire for buying an existing business…(3) Have you asked both an accountant and a lawyer to analyze your intended purchase before submitting an offer? Are you buying the accounts receivable and accounts payable? How old are they?

Questionnaire for buying a franchise Are financial projections and sales forecasts realistic; i.e., based on research and on the results of other franchises in operation? What is the public profile of the franchise? How many franchise operations are there and how successful are they? What are the cost involved? What is the profitability? Are products, raw materials, etc. purchased locally? Will they assist in training and management counseling? What are all the details and are they spelled out clearly in the contract?

Forms of Business Organization

Learning objectives Learning tasks: Describe the four forms of business organization Describe sole proprietorship Describe partnership Describe corporation Describe co-operatives Complete worksheet Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Forms of business organization Sole proprietorship Partnership Corporation Co-operatives Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Questions for choosing the most appropriate form of business How much capital is required? What kinds of expertise are needed to start & operate the business venture? What is the amount of control needed? How much financing is needed? Who would you be able to count on to make good decisions if you were away? Should the venture continue after your death? How much personal liability are willing to take? What would be the effect of taxation? Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Sole Proprietorship Advantages Disadvantages Inexpensive to create Freedom Profits Unlimited liability Difficult to raise capital High tax rates Limited life Difficult to attract employees

Partnership Advantages Disadvantages Shared work Ease of creation Potential for growth Responsibility for all debt Conflict among partners

Incorporation Advantages Disadvantages Limited liability Unlimited life Ease of raising capital Employee incentives Tax advantages Expensive to create and operate Regulations and reporting requirements

Co-operative Principles of Co-operative Action Voluntary membership Administration accountable to membership Member purchase shares Surplus revenues returned to members Education provided Co-ops work together

Worksheet: Personal Analysis of business form Form of business I have chosen ……………………………… Reasons for choice ………………………………………………… Difficulties of this form of business may include………… Methods of reducing/negating difficulties…………………. Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship

Dr. Hatem Elaydi, IUG, Fall 2016, Entrepreneurship